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http://hdl.handle.net/10419/25524
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| Title: | | International investment positions and exchange rate dynamics: A dynamic panel analysis  |
| Authors: | | Binder, Michael Offermanns, Christian J. |
| Issue Date: | | 2007 |
| Series/Report no.: | | CFS Working Paper 2007/23 |
| Abstract: | | In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a countrys international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a countrys net foreign asset to GDP position leads to a depreciation of that countrys effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks. |
| Subjects: | | Exchange Rate Determination International Financial Integration Dynamic Panel Data Models |
| JEL: | | F31 F37 C23 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CFS Working Paper Series, Universität Frankfurt a. M.
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